A Slippery Slope for Oil

Having risen as much as 18% this year, front-month crude-oil futures are feeling the ground slip from under them—they are up only 10% now. But the risk is bigger if you buy and hold oil futures via an exchange-traded product such as the U.S. Oil Fund.

The USO’s price doesn’t just reflect moves in the near-month contract. Because it rolls positions as monthly futures contracts expire, it also reflects the shape of the oil curve. When that slopes upward, rolling positions incurs a cost, weighing on the USO’s price. And vice versa. (See this earlier Heard on the Street column for a fuller explanation.)

The USO has lagged behind oil badly over several years, because the curve has sloped up most of that time. But the curve flipped this summer, giving the USO a boost—it has actually beaten the oil price slightly since the start of June.

But now, not only are oil prices cooling, the curve is shifting again. In early September, the front-month contract traded almost $3 a barrel higher than the third-month. Today, that premium is down to about 20 cents, and the curve could start sloping upward again soon. USO investors should be aware of how hard a climb that presents.